New Mortgage Lenders and the Housing Market

This paper examines how a new lender affects local mortgage and housing markets around its branches. Specifically, I demonstrate the impact on mortgage supply, house prices and repossessions. I use the decision of the European Commission to force the UK’s largest retail bank to divest a part of its business as a shock that generates a new entrant but does not add any resources to the economy. The results show that incumbent banks increase mortgage lending in areas where the new bank has its branches which has a strong impact on real estate markets. House prices, average transaction numbers and mortgage repossession rates all increase in places that receive a branch of the new bank. The effect on prices occurs through the discount rate as rents are not affected.